Primer: MMT Theory Of Inflation

The Monetary Monopoly Model (Section 4.3) is a core model of Modern Monetary Theory. If we take it literally, we do not need a theory of inflation, since the price level in some variants of the model is explicitly set as a policy variable. However, reality is far more complex than the model suggests, and if we want to match theory to reality, we are faced with the realisation that governments act in a fashion that sabotages the control of the price level that they do have.

(Note: This is an unedited draft of a section of my increasingly long MMT primer.)

Fed Rearranges Deck Chairs On Monetary Policy Titanic

The Federal Reserve has announced some changes to its description of the long-term objective of policy (link). From an operational perspective, this change is entirely cosmetic, and accomplishes nothing useful. It is really a distraction from the reality that the Fed is pushing on a string. The only way forward for monetary policy is for it to be transformed into fiscal policy.

Replicating MMT In A Neoclassical Framework?

One of the standard criticisms raised by many neoclassical economists is that there is nothing new to MMT. Given that neoclassical economists and MMT proponents have been arguing loudly online for over a decade, it seems hard to support the view that MMT is a subset of neoclassical economics. (Another weak point in the argument is that the person making it rarely has read any MMT academic work, so the critic is not exactly sure what features are part of neoclassical economics.)

A slightly less adversarial stance taken is that MMT insights can be replicated by adapting neoclassical methods. I think the answer to that question is: yes and no. Although it seems possible to get parallel results to parts of “narrow MMT,” but the integration with broad MMT does not appear to be possible. This is more plausible, and the subject of discussion here.

(Note: This is an unedited draft section of my MMT primer. It is part of a chapter discussing common critiques of MMT.)

Comments On Canadian Inflation Risks

There has been a cabinet shuffle in Canada, with the Finance Minister position moving from Bill Morneau to Chrystia Freeland. Newspaper reports hint at philosophical changes, moving towards a more free-spending strategy. Although the messaging might change, I would lean towards changes in practice being incremental. It is entirely possible that economic differences were played up to move attention away from other political concerns about the old finance minister.

Although supply disruptions might be tied to a bump in the price level, telling a story about sustained price increases -- inflation -- seems awkward, even with looser fiscal policy.

Primer: Understanding The Money Multiplier Model

I ran into a question about the Money Multiplier Model, and I realised that explaining it is a lot more complicated than I expected.  The story of the model is how an initial cash deposit at one bank creates a chain of smaller and smaller loans, until the aggregate loan book has grown by a multiple of the initial deposit. The key to understanding the model is that it is based on a defective behavioural assumption. That is, it would apply -- if bankers operated in a way that they do not do in the real world.

It is entirely possible that the reader is taking a course that teaches the model. This can be viewed as the "Devil's Guide" to it.

Primer: Broad MMT

The previous sections of this chapter (and earlier chapters) mainly revolved around what I term “narrow MMT.” This is the distinctive theoretical core of MMT, but it should be noted that the theory is fairly settled. Meanwhile, the academics associated with MMT continue to pursue research programmes, and hence the area covered by “MMT” continuously expands. This offends some critics, who insist that only some narrow set of principles constitutes MMT. Although it is entirely reasonable that someone would only be interested in the theoretical core of MMT, we need to accept that many MMT proponents view “MMT” as comprising the entire body of thought.

Note: This is an unedited draft from my manuscript on the subject of MMT and the cycle. It builds upon a distinction that I made earlier: describing MMT as either narrow MMT or broad MMT. Narrow MMT is the usual subject of online primers, and people often describe MMT as consisting solely of this. 

Understanding The Lack Of Relationship Between Supply And Bond Yields

Academics and strategists have spent decades trying to prove that increased deficits raise bond yields, and publishing a flood of papers that allegedly prove this link. However, nobody competent takes any of those papers seriously. This article outlines why these papers are largely doomed to failure, and are mainly exercises in how to figure out academics tried to lie using statistics.

Is MMT Only Applicable To The U.S.?

One common line of criticism relates to what is termed open economy considerations – can the foreign sector create constraints on fiscal policy that are not apparent in closed economy models? One simplistic variation of this is the argument that “MMT only applies to the United States,” that is, only a global hegemon that issues the reserve currency can afford to ignore the external sector.

(Note: this is an unedited excerpt from my MMT primer manuscript.)

Never Reason From A Change In Monetary Agggregates

I have been looking at questions on the Economics Stack Exchange, and many of them followed a depressing pattern: where is the inflation that results from the change in monetary aggregates? This is a common concern that has been popping up since the end of the Financial Crisis (even earlier in the context of Japan). The prescription is straightforward: one should never reason from a change in a monetary aggregate. The reason behind this is that monetary instruments are financial assets, and the size of the stock held depends upon the portfolio preferences of the private sector, which should be expected to be unstable.

This helps confirm that the message from Abolish Money (From Economics)! has not caught hold yet in the public imagination.

Who Sets The Yield Curve?

There was a debate on my Twitter timeline whether or not the Fed sets the entire yield curve. Since I am in the midst of writing a MMT primer, the party line is bubbling up in my mind: the yield curve is a policy variable. However, the exact mechanism is not entirely obvious, and the situation is arguably ambiguous.

Breakeven Inflation Unsurprisingly Low

Breakeven inflation rates in the United States have recovered from their crisis swoon, but remained at depressed levels. This is in contrast to the rather feverish inflation predictions that are coming from the usual sources, like gold enthusiasts.

This article is brief, just commenting on what I see as the implications of current pricing. I am largely reiterating my views that appeared in Breakeven Inflation Analysis. I am seeing commentators discuss the implications of low "real" yields, which I think is the wrong premise. As I discussed in Section 4.2 of my book, the breakeven inflation rate is what matters. The quoted yield on inflation-linked bonds (in my view, "real yield" is a term to be avoided, due to the ambiguity in the definition created by economists) is just the residual of the two metrics that matter: the benchmark nominal yield, and the breakeven inflation rate. All the quoted yields are telling us is that the markets are predicting inflation to be somewhat lower than desired, and that New Keynesian central bankers at the Fed will be New Keynesians.